The ASX index is riding higher again in Monday lunchtime trade, fresh off hitting a 10.5 year high on Friday.
The benchmark S&P/ASX 200 index is up 17 points to 6,289, with the BHP Billiton (ASX:BHP) share price leading the way, jumping 2 per cent higher to $33.83.
Bank shares are continuing their mini-recovery too, with Commonwealth Bank of Australia (ASX:CBA) shares up 1 per cent today to $76.48.
Since closing at $67.45 in the middle of June, the CBA share price has gained an impressive 13 per cent.
As for Telstra (ASX:TLS) shares, after last week’s stellar 6.7 per cent gain, they’ve given back a couple of cents today, the Telstra share price trading at $2.77, making my call that Telstra shares were pretty close to a buy when trading at $2.62 look very timely. Of course, it’s very early days.
Wall Street gains Friday
Pushing the ASX higher today is a positive close to Wall Street on Friday as US investors forgot about trade wars, tariffs and Trump’s tweets, focussing instead on the buoyant US labour market.
The US is in the midst of the longest continuous jobs expansion on record, with unemployment remaining near an 18-year low.
Not that you’d obviously realise, given various fears about volatility, market crashes, trade wars and general pessimism.
“The US economy remains strong and the jobs report today confirms that, but I think in the short term you should expect volatility with the tariffs taking effect,” said Shawn Cruz, manager of trader strategy at TD Ameritrade in The Wall Street Journal.
Volatility is actually riding low right now, well below its long-term average. Which is as you should expect, given the healthy state of the global economy, and given interest rate policy remains very accommodating.
Yet markets move in unpredictable ways.
Warning: volatility ahead
Remember the most recent bout of volatility?
It happened as recently as April this year, with one CNBC headline saying “Stocks haven’t seen this much volatility since the financial crisis.”
The S&P/ASX Index closed as low as 5,752 at the beginning of April.
Remember why markets were volatile? Me neither. A look back into the archives says it was because of fears of rising bond yields, Trump (of course) and tech stocks taking a dive, some of which was over data privacy concerns, but more of which was over the fear of fear itself.
In any case, given volatility is currently low, and the stock market has had a good recent run — the ASX 200 is up more than 9 per cent since early April — the odds are volatility increases from here.
But you shouldn’t be scared by volatility. It’s the reason why the share market offers you the potential to generate above average returns.
If you don’t like volatility, and aren’t willing to embrace the concept that the stock market doesn’t rise in a straight line, and if you aren’t willing to accept that some years the stock market will fall, stick to term deposits.
How to deal with volatility
That said, I realise volatility can be scary, especially for older Australians. You expect your nest egg to last as long as you, and if one year wipes say 15 per cent off it, you can easily fear running out of money in retirement.
My simple investing formula for retirement has an 80 per cent allocation to equities and a 20 per cent allocation to cash.
The cash allocation is designed to give you at least two years living expenses, something to see you through more volatile times without having to sell stocks at what could be a low point.
With the 80 per cent equity allocation, you’d target capital growth of around 8 per cent per annum, on average, over a 20 year period. Historically, equity markets have returned around 10 per cent per annum, on average, so 8 per cent is hopefully a little on the conservative side.
The point is, if you are prepared for volatility, and have a plan to deal with it, you shouldn’t fear it.
The best plan I know to deal with volatility is to invest in the stock market on a regular basis, through thick and thin.
Do it monthly, like clockwork. Set up a direct debit or BPay into a fund or ETF. If you are a stock picker, buy more of your favourite company every month. Investing hack #1: add to your winners.
That way, you take emotions out of the equation. Slow, steady, methodical wins the race, over time.
The other plan, even if you are not in retirement, is to run a decent cash balance. It helps you sleep well at night, and gives you the firepower to take advantage the inevitable stock market corrections and even stock market crashes should you choose to buy shares when everyone else is selling. Investing hack #2: buy when others are selling.
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